Classical Long Run Aggregate Supply

Supply-side economic policies to shift the LRAS out.

Think of it in terms of productive potential. If an economy is able to increase productivity, through improvements in things such infastructure/ education and training/ investment in new technology it will increase the PPF (Productive Potential Fronteir).



This would be shown on a Classic AD/AS diagram as a shift in LRAS which shows a new equilibrium where national income (Y) has increased, cetaris paribus.

Does this answer your question? Or were you looking for something more specific. Give an example question possibly?

Ok,yeah thanks that's helped me to make more sense of it. But also Im struggling to understand my theirs is perfectly inelastic. Is it purely because they believe that long term unemployment cannot exist as prices will adjust accordingly?

Basically it assumes that where the LRAS is, it is the maximum economic output given all its factors of production. Simplistically speaking, imagine there's one labourer in the whole economy who can produce 2 cars per year. It's impossible for him to produce more than two cars, so there can't be any increase in national output regardless of how hard he tries, because he's working to his maximum potential. (It's a macro-economic concept so imagine the labourer as being all workers combined)

A supply-side policy would be to invest in his training, such as providing him with a Mechanical engineering degree, now he has the knowledge and increased efficiency to produce 4 cars a year which will shift out the economy's productive potential. Hence the movement of the LRAS to the right. If the worker has a poor year maybe because he's ill, his productive potential is still there, he just hasn't reached it, this is why it is inelastic. The LRAS symbolises the maximum an economy is able to produce throughout the year, if all its resources (factors of production) are used efficiently. The LRAS just shows if all factors of production are used efficiently this is the maximum the economy can produce.

What its saying is if an economy is operating at its productive potential (where demand meets LRAS) then supply side policies should be sought such as investing in new machinery or building more factories. The only way to gain any real economic growth would be to increase that LRAS by increasing the factors of production (or making them more efficient such as through technological advancements) or else you would continuously be producing up to the same level as previous years which wouldn't benefit your economy.